Recession era's deferred bonuses paying off big for Wall Streeters

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From the ashes of the financial crisis emerged a big change in how Wall Streeters got paid. Out went the legendarily massive year-end cash bonuses. In came IOUs.

"People were screaming bloody murder," recalled Alan Johnson of compensation consultancy Johnson Associates. "They were yelling, 'Pay me now!' "It's safe to say the tantrum has passed. The IOUs—grants of company stock that couldn't be touched for years—are now worth huge sums because bank share prices have soared in recent years. In the coming weeks, many of these deferred bonuses will vest and result in vastly larger paydays than if bankers or traders had been paid in cash.Consider Goldman Sachs. After a challenging 2009, Goldman cut average employee pay by 13%, but to dull the pain, granted staffers $3.6 billion worth of shares that couldn't be sold until this coming January, according to a regulatory filing. The stock is currently valued at $5.1 billion because Goldman's share price has risen more than 40%, to a recent $190, and now makes for one hell of a stocking stuffer."You're going to see a deluge of bankers cashing out their restricted stock grants in the weeks ahead," said Mark Williams, a lecturer at Boston University and former Federal Reserve Bank examiner. "These grants are deeply in the money."The story at Goldman is much the same elsewhere.Bank of America granted employees $1.5 billion worth of restricted shares at a price of $7.78 each in early 2012, when the stock traded at close to a postcrisis low. BofA's stock now fetches $17 a share, meaning staffers could collectively pocket $1.8 billion in gains when people can begin selling the shares at the start of next year.Likewise, Morgan Stanley granted employees about $1 billion worth of stock in early 2012 at the depressed price of $18.09 a share. The stock, which fully vests in January, has since doubled, and the value of the grant is now $2 billion.

'Turned into gold'

Another Goldman payout from the dark days of late 2008 is looking mighty good. Back then, the firm granted employees the right to buy 36 million shares at a price of $78.78 each on the condition they wouldn't sell the stock until January 2014. When the restrictions faded away, the shares traded at more than twice the price paid by Goldman employees.

"The crisis-era stock awards have turned into gold," Mr. Johnson said.The wave of bonus payouts from prior years now hitting shore is so strong that it could lift income-tax receipts from Wall Street this year, even though bank profits are expected to be flat or slightly lower, according to an October report from the New York state comptroller's office. The state collected 19% of all its tax revenue, or $13.2 billion, from Wall Street-related activity last year, and the city collected 7%, or $3.2 billion.Mr. Johnson said he expects that bonus pools for traders could drop by 10% this year but rise 15% for bankers who specialize in taking companies public or merging them.Deferred pay has been common currency on Wall Street for years. But it has grown dramatically since the financial crisis amid pressure from shareholders and regulators to crack down on excessive risk-taking and better align pay with longer-term performance. Before the crisis, deferred compensation typically accounted for 25% of pay for Wall Street's most highly compensated people. Today, it's about 75%.

No more grumbling

Even less richly rewarded mid-level bankers saw more of their bonuses deferred and paid in shares. That change caused much grumbling among the rank and file, who often had to stay with their employer in order for the stock to fully vest three or even five years down the road.

"These grants were seen as a form of handcuffs," said John Ricco, a partner at the Atlantic Group, a financial-services recruiter.The grumbling grew louder in the years after the crisis as many of the grants sank underwater—that is to say, were worth less than the stock's market price.For instance, in 2010 BofA granted more than 200 million restricted shares at an average price of $14.40, only to see its stock price crumble to below $6 a share by late 2012, before its steady march the past two years to $17.In 2011, Citigroup granted employees $1.6 billion worth of shares valued at $49.59 each. The grant didn't look so good when Citi's stock price sank by half later that year, but now the shares are valued at about $1.8 billion because Citi's stock trades for $54.Citi's rise from its post-crisis low mirrors the rest of the banking sector, where stocks have been on a tear since the start of 2012. Financial stocks have rallied by 92% in that time, the most for any industry except for health care, and have risen 22 percentage points more than Stand-ard & Poor's 500-stock index.One reason for the rally is that investors are pleased that banks have managed to lower their biggest variable cost—salary—by spreading bonus payouts over longer periods.

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